Wendy’s Asks: ‘How Much is the Beef?’
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Wendy’s International Inc. once again is asking, “Where’s the beef?”
That is the hamburger chain’s most memorable advertising tagline. Now, as it faces substantially higher beef costs than it anticipated, the company once again is wondering where the cattle went.
After discovery of a lone case of mad cow disease in the U.S., many foreign countries banned the import of American beef, leading to assumptions that there would be a glut of meat for domestic consumption.
But that hasn’t happened.
“The prediction of beef costs has confounded some of us,” Wendy’s chairman and chief executive, Jack Schuessler, said during a pre-market conference call yesterday in explaining why the company lowered its full-year earnings guidance.
Disclosing that beef is expected to cost about 14% more this year – $1.31 a pound, versus $1.15 in 2003 – Mr. Schuessler said, “We thought [costs] would come down in the third quarter. Supply is up. Production is down. That tells me [cattlemen] are holding it off the market. Grain must be cheap.”
Higher prices for replacement cattle also have encouraged feedlots to hold on to the animals they have and put more weight on them. Also, America is at the low end of the cattle production cycle, leaving the country’s breeding herd smaller than it has been in years.
Mr. Schuessler predicted that once the American presidential election is over, the American-Canadian border would reopen to imports. America halted imports after a case of mad-cow disease was discovered in Alberta in May of last year. An infected cow subsequently discovered in Washington State was traced to a Canadian herd.
Citing higher beef costs as well as substantial lost sales from the series of hurricanes that lashed America in recent weeks, Wendy’s late Tuesday lowered its full-year earnings guidance to a range of $2.25-$2.30 per diluted share from $2.32-$2.37. For the current third quarter, the Dublin, Ohio, restaurant chain cut its forecast to 59 cents-60 cents a diluted share. The Wall Street consensus had been 64 cents.
The company said it lost more than 2,000 store days of sales in the quarter from hurricanes and related rainstorms. As a result, company-operated same-store sales are about 1% lower than a year ago.
Wendy’s has about 18% of its stores in Florida, Georgia, Louisiana, Alabama and Mississippi – the states hardest-hit by the hurricanes. But heavy rains in the Northeast also pummeled its sales.
Seventeen Wendy’s restaurants remain closed because of hurricane damage, the company said.
“I’ve been in this business for a long time, and this is probably the most difficult conditions and changes” he has seen, Mr. Schuessler said.
Besides the weather and beef-related hits, Wendy’s cited ongoing problems at its Baja Fresh Mexican fast-casual chain in lowering its earnings guidance.
But during the conference call with analysts, Mr. Schuessler said “we’ve made some very good progress” in turning Baja around. “We believe in the brand, and we’re going to see it through.”
At least two brokerages – Credit Suisse First Boston and JMP Securities – downgraded Wendy’s shares yesterday, while numerous analysts cut their earnings estimates for this year and next.
Shares of Wendy’s closed yesterday at 33.34, off 2.16, or 6.08%, on the New York Stock Exchange.
Other beef-related stocks also were trading down. McDonald’s Corp. was at 27.01, off 76 cents, or 2.74%, while Jack In The Box Inc. was priced at 29.41, off $1.26, or 4.11%.
CKE Restaurants Inc. shares continued to decline, down 25 cents, or 2.3%, to 10.60.